The impact of social capital on economic performance: lessons from small and medium size enterprises (SMEs)

UnrestrictedThe study bridges transition scholarship with social network studies to examine whether the social embeddedness of economic actors in transition is a source of advantage or an impediment for private sector growth. Transition scholars have recognized the omnipresent role of informal personal exchange, reciprocal ties, social networks, and exchange of favors as socialist legacies and path-dependent cultural aspects in the post-communist context. However, they have been less successful in recognizing the role of these cultural factors as agents of institutional change. Adopting a structural approach to social capital, this analysis centers on social networks and the resources embedded in the relationships that form them. Original empirical evidence from small and medium size enterprises (SMEs) in Serbia and Montenegro is utilized to examine whether differences in business success can be explained through the differences in micro-level social capital and the nature of informal exchange relationships.; Empirical analysis shows that, much like confidence in courts, informal networks are an important component of the security of property rights that encourage private sector investment. Variation in the extent to which networks are used in dispute resolution and the degree to which SME managers and owners invest in their business ties help explain differences in profit reinvestment. Probing further into what network aspects drive small business success, the study finds that network structure positively impacts growth in sales. However, structural impact is dependent on the content of exchange facilitated by network ties. When it comes to networks' role in serving as an informal mechanism for contract enforcement, dense and homogenous networks are preferred. For accessing valuable resources, capital, and favors, heterogeneous and less dense networks perform better.; Lastly, this study employs the transaction cost framework to show that costly network ties represent an efficient investment of limited resources. However, individual decisions to optimize on transaction costs through the use of networks can coordinate to socially inefficient outcomes. Suboptimal outcomes can persist when personalized exchange prevents changes to formal institutions designed to lower incentives for the use of social networks